8/31/2010 @ 10:00AM

America's Most Profitable Hospitals

The average American hospital barely breaks even. But some are enormous profit centers. Forbes’ first-ever survey of America’s most profitable hospitals reveals that some American hospitals make 25 cents or more for every $1 in patient revenue they take in.

Our list, done by the American Hospital Directory, is based on operating income figures that hospitals must report to the federal Medicare program each year. It found that 24 hospitals in the country with over 200 beds make an operating margin of 25% or more. That kind of profit margin compares favorably to drug giants like
Pfizer
, who are often vilified for charging too much for their drugs. It easily beats the operating profit margin that
General Electric
reported last year.

The most profitable hospital in the country, 235-bed Flowers Medical Center in Dothan, Ala., recorded an incredible 53% operating margin. It is part of the big for-profit
Community Health Systems
chain in Brentwood, Tenn. Del Sol Medical Center in El Paso snared second place with an astronomical 45% operating margin. It’s part of the big HCA chain, based in Nashville. Neither hospital returned calls asking for comment. After this story came out, Flowers Hospital disputed the figures in an e-mail. It says it overstated its revenue by an astonishing $180 million in its official report to Medicare and that its actual margin is 12%.

Not surprisingly, a disproportionate 15 of 25 hospitals on our list were part of for-profit chains. HCA had 10 other hospitals in the top 25, including Medical City Hospital in Dallas, with a 26% operating margin; it is expected to do an initial public offering soon. But some big nonprofits also made the list, including both of Mayo Clinic’s main hospitals and Ohio State University’s hospital.

Some say profitable hospitals may be using local monopoly to overcharge insurers and patients. Others see the high profits simply as sign of efficiency and good quality.

The question is important because hospital charges represent about a third of total health care spending–$718 billion altogether. It’s more than what’s spent on doctors, drugs, nursing homes or any other category-type of care. Hospitals have been quietly consolidating in recent years. Now many hospital “systems” dominate their regional markets, often allowing them to dictate prices to insurers who pay the bill.

“Profitability can be as simple as being in a protected market [with little competition] and having lots of privately insured patients,” says Michael Millenson, a consultant with Health Quality Advisors in Highland Park, Ill. Private insurance usually pays more than the federal Medicare program.

In an industry where four in five facilities are nonprofit charities, those that do run a profit draw scrutiny from policymakers, HMOs and local communities. Hospitals have been accused of excessive charges, discriminating against uninsured or underinsured patients and acting like monopolies by controlling a specific market. Even acknowledging profitability is taboo at many facilities.

There’s another school of thought, however, that says that hospitals that are well-run financially are often those that are producing the best clinical outcomes.

Lisa Goldstein, the head of health care bond ratings at Moody’s, argues that better quality control can improve hospitals’ financial performance. “A strategy aimed at quality can result in improved market share, better ability to recruit and retain physicians, lower nursing vacancy/turnover rates, improved financial performance,” she wrote in an influential report. Moody’s now looks closely at hospital clinical quality measures when rating debt offerings.

The median operating margin for 200-bed hospitals and above was slightly negative (-0.7%) last year. That means the money that was brought in from patients fell short of what they needed to spend on staff, equipment, buildings and other items.

William Shoemaker, of the American Hospital Directory in Louisville, Ky., says patient satisfaction scores from Medicare’s Hospital Consumer Assessment of Healthcare Providers and Systems survey correlate meaningfully with profitability. He argues that hospitals become more profitable by delivering higher quality care. “Companies that are well-run tend to have happy customers,” he says.

Some hospital chains may use big profits from their premier hospitals to finance empire building around the country. The Mayo Clinic’s two main hospitals in Rochester–Rochester Methodist Hospital (No. 3 on our list) and St. Mary’s Hospital (No. 25)–are both enormously profitable. Yet the Mayo Clinic overall is only modestly profitable, according to its financial statements. Where does all that money go? A spokeswoman for Mayo had no comment. But some of the money may be flowing south to Phoenix, where Mayo has operated an unprofitable hospital since 1998, and to Jacksonville, where it opened a new hospital in 2008.

St. Luke’s, in Cedar Rapids, which is known for its top-flight cardiac care, is the fourth most profitable hospital in the country with a 36% margin. Scott Kallemeyn, director of operations support at St. Luke’s, says that the true operating margin is in the low single-digits. Payments to its parent hospital system for information technology and financial services aren’t captured, nor is equipment depreciation, he says.

Ohio State University Hospital reported a hefty 32% profit margin to the government. When asked about it chief financial officer Jeff Ellison cracked: “I’d like to buy stock in us,” but refused to comment further. Later the university wrote an e-mail claiming the Medicare report “does not give a complete picture.” It would not explain how.